Igor Gonta

About the Author Igor Gonta

Igor Gonta is the CEO of Market Prophit and brings a wealth of experience both in the financial markets as well as on the big data front. Igor Gonta spent 13 years on Wall Street in commodities sales and trading, having worked at Goldman Sachs, Barclays, Credit Suisse, and Constellation Energy. Igor has broad experience and a deep understanding of markets, trading, quantitative analysis, and derivatives pricing. Prior to Wall Street, Igor built large relational databases of banks’ accounts payable systems while at Mitchell Madison Group, a strategy management consulting firm. These databases were data mined for information to help categorize and map indirect expenses and identify costs saving opportunities. Igor also did database development for PlanetAll, a social networking, calendaring, and address book website launched in 1996 that was later acquired by Amazon. Igor holds an S.B. and an M.S. in Computer Science & Electrical Engineering from the Massachusetts Institute of Technology.

A Closer View of Fed Rate Hike Speculation

As the dog days of summer are nearing an end, intense focus on whether Janet Yellen and the Federal Reserve’s Federal Open Market Committee (FOMC) will raise interest rates anytime soon has reached a fever pitch. If there is any other area of the U.S. economy subject to more speculation right now, we don’t know about it. For over seven years, benchmark interest rates have been close to zero, but analysts and Fed watchers have long predicted a raise in September, although that is not at all certain. Both Hawks and Doves are busy parsing the snippets of information coming out of the central bank for signs of what is to come, and applying any related economic news to support their opposing viewpoints of whether a policy change would be a good idea.

News has abounded on the release of the minutes from the Fed’s July meeting, which seemed to indicate that FOMC members want to see stronger economic growth than exists today before raising rates. According to Bloomberg, the minutes from the Fed’s July meeting prompted a decrease in the probability that futures traders assign to a potential rate increase from 50 percent to 36 percent. Add to this some trepidation about the Chinese devaluation of the yaun, which could potentially cool the U.S. economy, and it seems that the long-held view that interest rates will go up in September is being called into question.

One way to view market expectation of the Fed and the potential for a change in interest rates, is through the lens of both stock prices and market sentiment related to a couple of key ETFs which could be affected by such a change. We think a useful gauge can be found in the prices and expectations related to long-term bonds as seen by the iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) and the relative strength of the dollar demonstrated by PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP), which tracks the Deutsche Bank Long US Dollar Futures index. Simply put, investors who expect the Fed to raise rates would be bearish on Treasuries and bullish on the dollar.

We also believe that investor sentiment is tremendously important in gauging expected price movement in TLT and UUP and thus provides some insight into how the marketplace views the potential rate rise.  Below are two charts showing information on sentiment garnered from Twitter, from both the “Crowd,” anyone who Tweets using the cash-tags $TLT or $UUP, as well as our ranked group of “Market Prophits,” who are mavens selected based on the accuracy of their financial Tweets and track record of predictions.

Looking at the prices of TLT over the last 4 weeks (below), we see a closing price on July 10th of $116.05 steadily increasing to 124.75 on August 11th, for a climb of 7.5 %.  During that same time period, using the Market Prophit Z score, (a normalized measure of sentiment over a defined window of time), we are able to see that investor sentiment from both the Crowd and the Market Prophits expressed on Twitter predicted the continued upswing of TLT prices.  As seen in the chart below, early in July, the Market Prophits were bearish, but turned bullish and started agreeing with the Crowd on July 10th.  Looking later, we see that the sentiment of both groups has dropped below zero, on August 11th, and started trending negatively possibly indicating an expectation that the Fed will raise rates at their upcoming meeting.

TLT Sentiment and Price

Looking at the chart of sentiment and price on UUP (below), we see that the Market Prophits and Crowd are fairly closely aligned, both becoming decidedly positive on June 17th and maintaining that positive sentiment until July 2nd, preceding the short rally in July, during which the ETF gained .47 cents going from $24.70 to $25.17.   After both Crowd and Market Prophits started trending negatively again on July 15th, which again preceded a fall in UUP, both sentiments have recently turned bullish on August 12th.   And while the Crowd sentiment has recently turned toward the neutral mark, the Market Prophits remain bullish even after the release of the Fed minutes from the July meeting which some in the market are calling dovish and possibly signaling that a rate rise won’t happen in September.

UUP Sentiment and Price

And so, today, it appears that both bond and dollar investors, as seen through Twitter, are still in the camp of a possible rate rise in September despite the Fed’s minutes.  However, it will be important to watch how both the Crowd and Market Prophit sentiment continue to trend going forward and especially look for possible diverging sentiment as an indication of disagreement between the two groups.

In a little less than a month, the Federal Reserve will hold its September meeting.  The speculation about a possible rate rise will continue and investors will continue to express differing opinions in advance of any announcement. We think that following the sentiment on TLT and UUP can add a valuable dimension to the process, and a preview of what different groups of investors are thinking about.   At Market Prophit, we welcome any inquires on our sentiment data as September, and a possible Fed decision, approaches.


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